No.4 SERIES 2018 A Publication of Business Club

MAKATI BUSINESS CLUB FORUM TRAIN-2 AND LEGISLATIVE PRIORITIES CONGRESSMAN DAKILA CARLO E. CUA Chairman, House Committee on Ways and Means SENATOR JUAN EDGARDO M. ANGARA Chairman, Senate Committee on Ways and Means

Senator Sonny Angara and Congressman Dax Cua were the speakers at the MBC General Membership Meeting on 27 July 2018 at the Discovery Primea in Makati City. Published here are excerpts from their speeches and the open forum. Page 2 MBC FORUM 4-2018 activities that benefit itself, the people it employs, CONGRESSMAN DAKILA CARLO E. CUA and even society. This could be in the form of Chairman, House Committee on Ways and Means additional investments in its people, facilities, and technologies. When we started discussing fiscal incentives in the House of Representatives, I envisioned a TAX AMNESTY PROGRAM modern incentives regime that will address the To complement reforms in our tax system, we’ve gaps in our value and supply chains. To do this, we also been working on a tax amnesty program. must identify priority activities and support these While on recess, we’ve held several discussions activities with appropriate incentives. to scrutinize the proposal. Our primary aim is to increase the turnout of taxpayers filing for RATIONALIZING FISCAL INCENTIVES amnesty. Presently, the government offers the same package of incentives regardless of which industry In this regard, we’ve done two things. First, we’ve an activity is part of. It’s about time we move on set reasonable rates based on an agreed-upon from this practice by offering packages responsive tax base. Second, we’ve expanded the program to the distinct challenges present in each industry. to include not only estate and income taxes, but also customs duties. With these, we can provide LOWERING CORPORATE INCOME TAX taxpayers with a clean sheet and transition them As decision makers, we take great pains in planning to the new tax system. and forecasting. A realistic set of assumptions is therefore critical. When you plan your businesses, PARTNERING WITH THE PRIVATE SECTOR you will need certainty over the tax rates your Well-targeted incentives, freed-up resources for businesses will face. businesses, and a larger tax base all contribute to a more vibrant Philippine economy. The next We understand this concern and have proposed challenge will be to ensure that gains at the macro a predictable reduction of the corporate income level translate to more jobs and opportunities that tax by one percent a year until it hits twenty uplift standards of living. percent. With the lower tax rate, we hope that businesses can allocate freed up resources to Incidentally, I, together with private sector stake- holders, will be officially launching TAO—Trabaho at Oportunidad. As its ambassador and spokes- person, I would like to personally invite you to partner with us. Together, let’s build an ecosystem of advocates for education, employment, and en- trepreneurship. With businesses providing em- ployment, education and training institutions de- veloping skills and competencies, and government facilitating, we can deliver a better outcome for the Filipino people.

“When you plan your businesses, you will need certainty over the tax rates your businesses will face.” Page 3 MBC FORUM 4-2018 SENATOR JUAN EDGARDO M. ANGARA Chairman, Senate Committee on Ways and Means

The President endorsed the package of the second and succeeding packages of TRAIN, or the Tax Reform for Acceleration and Inclusion, during his State of the Nation Address.

TAX REFORM IN CONGRESS Tax reform has had an interesting history in Congress: In the last 15 years, the rationalization of fiscal incentives has been passed in only one of the Houses, and never both at the same time.

TRAIN-2, in particular, has an added degree of difficulty because the Department of Finance wants to revisit the tax provisions of legislative franchises. (There are about 40 franchises being reviewed by DOF.)

Package 2 is basically the rationalization of “In the last 15 years, fiscal incentives, combined with the lowering of the rationalization of corporate income tax. In the Senate, nobody has filed the entire package, which includes the repeal fiscal incentives has or amendment of legislative franchises. But there are two bills on fiscal incentives by Senators Drilon been passed in only and Recto, and four bills on lowering corporate income tax, including one I filed. one of the Houses,

Under our Constitution, tax bills must originate and never both at the from the House, so we look forward to the product same time.” of the House of Representatives. income earned (GIE) that is currently collected in ON MBC’S POSITION PAPER ON TRAIN-2 lieu of all taxes, to be replaced by a set of perfor- I recently received a copy of the Makati Business mance-based incentives. MBC suggested that the Club position paper on TRAIN Package 2, and proposed phase-out schedule of two to five years I agree that there is a need for certainty and be reconsidered to give affected companies more predictability of the schedule of tax rates, as I time to adjust.] understand that it would be hard to invest if the corporate tax rates are uncertain. I recently met with the International Monetary Fund and we discussed that, historically, the In fact, when the Senate Ways and Means country is used to having fiscal deficits. The Committee (which I head as chairman) met with role of incentives seemed positive, especially at the Department of Finance in February or March, a time when the Philippines was not the most the computation of tax rates was one of our initial attractive investment destination. But now that comments submitted. the country is on the radar and it enjoys a time of fiscal surpluses, the thinking has changed and On time-bound and performance-based incen- incentives are now seen as a bad thing. However, tives. [Editor’s Note: In its position paper, MBC the transition needs to be managed gradually noted the proposal to remove the 5% tax on gross as it moves forward, and I agree [with the MBC Page 4 MBC FORUM 4-2018 position] that 2-5 years for the transition is too short.

On administrative reforms to grant BIR the power to prosecute criminal/tax cases. I can see the rationale behind it, seeing the legendary backlog in the Justice Department. There are also concerns about corruption. But there is a more practical concern: out of the 20,000 employees of BIR, as of August 2015, there are 11,000 unfilled positions. A lot of these vacant positions are for lawyers and accountants.

Another option could be the creation of a tax division within the Department of Justice to handle tax-related cases. The Makati Business Club invites resource On the rationalization of tax incentives. speakers to its General Membership Meetings Congressman Cua and I have worked on the and Roundtable Discussions to discuss public Tax Incentives Management and Transparency issues and trends, whether local or global, that (TIMTA) Law of 2015, along with Congressman have an impact on Philippine development. MBC Miro Quimbo, and that is a move forward in the Forum highlights the speeches and discussionas paradigm shift from incentives to subsidies. at these gatherings.

From the DOF standpoint, incentives do not count towards collection, and we are looking at working with the DOF to ensure that we can book those target revenues while also not punishing businesses, moving forward.

On easing economic restrictions. The move in Congress is really towards less protectionism. Even in the Charter Change proposals, there is more economic liberalization and less nationality requirements.

On repealing exemptions to broaden tax base. It’s probably not a good idea to repeal the exemp- tions on government-owned and controlled cor- porations, educational institutions, and hospitals leading up to an election—and you would know where Congressman Cua and I stand on that.

Excerpts edited by MARY ELIZABETH A. BAUTISTA Page 5 MBC FORUM 4-2018 Q&A

Q: [On MBC’s position paper on TRAIN-2] In terms of the PEZA, as most locators don’t want to deal of the reduction of corporate income tax rates, with local governments. They like the fact that tax we favor the bill that Congressman Cua filed (HB payments are done through one regulator and 7458) that reduces the CIT to 20 percent. Because channel. That is one feature we must keep. PEZA even with Congresswoman Suansing’s proposal told us that in no uncertain terms should those to lower it to 25 percent, we would still have one factors be affected, and I also think there is no of the higher corporate tax rates in the region and reason to touch that. therefore will not be as competitive. CONGRESSMAN CUA: The emerging thought Second, we agree with the rationalization of whenever we talk to locators is that they want incentives and that it should be time-bound and some sort of shield from—not all, but some—LGUs. performance-based, but there should be a longer That being the case, we support the idea, but period of time to adjust, especially for companies we are looking at possible innovation that aims that will be affected. to have the (tax) collection zone at PEZA, but the just share of LGUs can be remitted easier and We should also take note of the concerns brought faster without having to go through the National up by PEZA locators, as they have been key to Treasury. the country’s development. It would be a pity for these locators to move out of the country In addition, in a hearing last week, DOF because they feel aggrieved that they signed Undersecretary Karl Chua presented the agreements, then the government changes these cost-benefit analysis of agriculture, services, agreements mid-stream. Senator Angara also manufacturing, and non-manufacturing. In his mentioned the BPO industry, and they should report, manufacturing and agriculture will have likewise be given an opportunity to air their benefits that outweigh costs. In the meantime, he concerns. is still working on the cost-benefit analysis of non- manufacturing and services, which are less likely Lastly, allowing the BIR to prosecute cases on their to benefit. own in terms of violators of tax laws will create legal problems, because we believe it might be in violation of the Administrative Code. Q: The cost-benefit analysis that Undersecretary Chua is making does not consider some qualitative factors: One, we are not the only SENATOR ANGARA: I have had many sit-downs investment destination in town. Vietnam, with business groups and chambers, and one Myanmar, and Indonesia are trying to attract thing that is repeatedly said is the one-stop nature the same types of investments. And although we Page 6 MBC FORUM 4-2018

already have a law on ease of doing business, it will take time before we can really improve our business environment. Vietnam, for example, is so hospitable to foreign direct investments.

Two, timing is very important, especially with the trade war led by President Trump. A lot of investors are looking for alternative sites, and Southeast Asia is definitely on top of that list.

Lastly, even assuming that the work of Undersecretary Chua is correct in saying that locators are profitable enough, it should be considered that profit is not the only factor. The fact that we are also competing (with other countries) should also be considered in the proposal to remove incentives from PEZA locators.

As for PEZA, we should also consider that—more than ever—our peso is depreciating, which affects exports coming from PEZA zones. And that is why we cannot afford to remove incentives from locators, who mainly export.

CONGRESSMAN CUA: I agree that we are not the only investment option, and we hope you can attend our hearings and say that on the record in front of Undersecretary Chua.

I would also like to add one point about administrative reforms: I agree with technology- based administrative reforms, making it easier to pay taxes and creating contact-free transactions between BIR and taxpayers. But I am also wary of reforms that strengthen state agents. We all know that state agents, when empowered, can use this power in the interest of the state, or otherwise. This is why I am particularly concerned about this kind of reform, especially for the BIR. Page 7 MBC FORUM 4-2018

The two legislators with members of the MBC Board of Trustees, namely (from left) Ambassador Jose Cuisia Jr., Edgar Chua, Jaime Augusto Zobel de Ayala, Ramon del Rosario Jr., and Cirilo Noel.

About The Speakers CONGRESSMAN DAKILA CARLO E. CUA is the lone representative of the province of Quirino at the House of Representatives. Having served for eight years as congressman, three years as governor, and six years as vice governor of his province, Cua has built an impressive public service record spanning the executive and legislative branches of government.

He has led efforts to pass landmark legislation that criminalizes monopolistic and cartel-like behavior (Philippine Competition Act) and lowers income taxes for 9 percent of individual taxpayers (Tax Reform for Inclusion and Acceleration).

Congressman Cua earned his business administration degree from the University of the Philippines.

SENATOR JUAN EDGARDO M. ANGARA started his first term as a senator in 2013. Previous to this, he was the representative of province at the House from 2004 to 2013.

He has sponsored and authored more than 80 laws in his 14 years as legislator. He authored the Universal Kindergarten Law, Open Learning and Distance Education Law, Youth Entrepreneurship Law, Integrated History Law, Unified Student Financial Assistance System for Higher and Technical Education Law, and the Universal Access to Quality Tertiary Education Act.

Senator Angara graduated from the London School of Economics, University of the Philippines College of Law, and the Harvard Law School. Page 8 MBC FORUM 4-2018